Amid this raging global pandemic, you may be rethinking your priorities with respect to how you invest your money. At least that's the conclusion of a recent report from JPMorgan. The paper explores COVID-19 as a sustainability crisis, arguing that the pandemic has sparked increased interest in investing for good, more commonly referred to as ESG investing.
Fortunately for anyone who is inspired to add some purpose to their investing, there's a growing selection of ESG funds themed around specific causes that make doing so easy.
The promise of ESG investing
ESG stands for "environmental, social, and governance" -- the three additional categories of criteria that a socially responsible investor weighs alongside financial data when making investing decisions. ESG investing is anchored by the belief that discipline in the pursuit of sustainability and socially responsible activities improves a company's financial performance and reduces risk over time.
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But ESG investing offers more than the promise of better financial returns in the long term. Numerous studies support the conclusion that companies with solid sustainability track records are delivering lower risk today, with financial results that are the same or better than their non-ESG counterparts. A report from the Morgan Stanley Institute for Sustainable Investing confirmed these conclusions after analyzing the performance of nearly 11,000 ESG and traditional mutual funds between 2004 and 2018. Similarly, a 2019 Morningstar analysis found that 41 of the firm's 56 ESG indexes had outperformed their non-ESG equivalents since inception.
These findings have fueled the popularity of ESG funds, which can be structured to support goals both broad and narrow. A broad fund, like the Vanguard FTSE Social Index Fund, might track an index that screens companies on a large range of ESG criteria. Other funds take a more targeted approach by supporting specific causes such as fighting climate change or improving gender diversity in corporate leadership and gender equality in the workforce.
Climate change
Funds address the issue of climate change from a number of angles. Some support companies that are pursuing zero carbon footprint goals, for example, while others invest exclusively in clean energy providers.
Two such funds that bear watching are iShares Global Clean Energy ETF (ICLN -0.60%) and SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX -1.16%). The iShares ETF invests in 40 or so companies around the world that produce electricity from solar, wind, and other renewable sources. The SPDR ETF tracks the performance of the S&P 500 Fossil Fuel Free Index, which includes S&P 500 companies that do not own fossil fuel reserves. Of the two, that second fund has the more diversified portfolio, with more than 480 holdings.
|
Fund |
Assets under Management |
Number of Holdings |
Net Expense Ratio |
3-year Return |
|---|---|---|---|---|
|
iShares Global Clean Energy ETF (ICLN -0.60%) |
$1.7 billion |
43 |
0.47% |
26% |
|
SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX -1.16%) |
$683 million |
487 |
0.25% |
15% |
Table data source: iShares.com and SSGA.com
Gender diversity
The ESG space addresses issues outside of environmental sustainability, too. One that's gaining momentum among investors is gender equality.
The Pax Ellevate Global Women's Leadership Fund (PXWEX 0.18%) and the SPDR SSGA Gender Diversity Index ETF (SHE -0.96%) both invest in companies that have gender-diverse leadership teams, as well as cultures that support the empowerment of women in the workplace. The Pax fund is weighted toward U.S. companies, but also offers exposure to Europe, the Middle East, and the Pacific. SHE, which tracks SSGA's Gender Diversity Index, is weighted toward technology and healthcare companies in the U.S., with positions in PayPal, Texas Instruments, and Netflix, among others.
|
Fund |
Assets under Management |
Number of Holdings |
Net Expense Ratio |
|---|---|---|---|
|
Pax Ellevate Global Women's Leadership Fund (PXWEX 0.18%) |
$623 million |
408 |
0.80% |
|
SPDR SSGA Gender Diversity Index ETF (SHE -0.96%) |
$139 million |
165 |
0.20% |
Table data source: Impaxam.com and SSGA.com
The Pax fund, established in 1993, has delivered a 10-year annualized return of 9.88%. The SPDR SSGA ETF was launched in 2016, and has generated annualized returns of 10% over the last three years.
Investing for a cause
ESG investing carries the same types of risks of traditional investing -- namely, that some of your choices might underperform. That's why you still have to research and evaluate all of your fund choices based on investment strategy, expenses, management experience, and track records. The size of the fund can be an issue as well; young funds and funds with very specific screening criteria can be far less liquid than their broader and more established counterparts.
Be disciplined about that research and decision-making process. At the end of the day, your goal as an ESG investor is to deploy your money in a way that aligns with your values, without compromising on financial returns.
